The UK government implemented anti-terror laws to freeze the estimated £4 billion worth of British financial assets in a failed Icelandic bank, it has been revealed.

The freezing order against Landsbanki, which owns failed internet bank Icesave, was issued under the 2001 Anti-Terrorism, Crime and Security Act.

The move threatens to drag down British-Icelandic relations to their lowest point for over three decades, with Gordon brown announcing legal action against Reykjavik authorities yesterday to recover depositors' money.

Iceland's prime minister voiced disappointment at the lack of western assistance he has received and warned he would find "new friends" for a loan, in this case Russia.